Employers can pursue pension plan change with renewed vigour following the publication of the judgment in the IBM appeal. They can now be less concerned about whether promises they have made in the past may bind them into the future, as the weight of an employee’s “reasonable expectations” argument has been significantly downgraded making it more difficult for an employee to successfully challenge pension plan change on the basis that it breaches the employer’s duty of good faith.

Allowing IBM’s appeal, the Court of Appeal overturned the High Court’s ruling that IBM had breached its duty of good faith in introducing the “Project Waltz” pension changes, because of the reasonable expectations it had previously engendered as to defined benefit accrual and early retirement and its contractual duty of trust and confidence by removing the pensionability of future salary increases. In arriving at the decision, the Court of Appeal decided that though the trial judge had identified the correct legal test, he had applied it incorrectly, and he had wrongly elevated reasonable expectations to give them “paramount significance” over other relevant factors. The correct approach was to apply a rationality test, with reasonable expectations forming just one of many factors for consideration in the decision-making process.

The Court of Appeal also found in favour of IBM that making a “threat” that DB members would not receive pay increases other than on a non-pensionable basis, did not breach the contractual duty of trust and confidence. While specific to the pension plan rules, the representative beneficiaries’ cross-appeal that the exclusion power in the rules had been used for a collateral and improper purpose to break the final salary link was refused.

The representative beneficiaries have indicated they will not seek to appeal the decision before the Supreme Court.

Employers should consider member expectations that have arisen from previous communications when making pensions changes and should ensure that consultation is carried out properly. There are still a number of legal pitfalls for the unwary – not to mention problems arising from employees who perceive that promises have been broken.

Afshan Mallik authored this article.